WASHINGTON (Reuters) - A federal watchdog is expected to soon release a report criticizing how the U.S. Securities and Exchange Commission handled a probe of alleged swindler Allen Stanford, people familiar with the matter said on Tuesday.

The report by SEC Inspector General David Kotz is expected to be highly critical of the agency, unlike a narrowly focused report he released last July.

It comes as the agency has been trying to rebuild its reputation after missing Bernard Madoff's fraud.

Stanford is in a Texas jail awaiting trial on 21 criminal charges related to an alleged $7 billion scheme involving the issuance by his Antiguan bank of certificates of deposit (CDs) with improbably high interest rates.

Authorities accuse Stanford of running a Ponzi scheme, in which early investors are paid with the money from new clients.

Some of his former investors are blaming the SEC and the Financial Industry Regulatory Authority, a broker-dealer regulator, for not stopping the Texas financier sooner.

In his July report, Kotz concluded that the SEC did nothing wrong when it "stood down" on investigating Stanford at the request of federal prosecutors.

But the new report, which looks further back at the agency's dealings with Stanford, suggests the SEC dragged its feet in getting its own probe under way, the sources familiar with the report said.

The sources requested anonymity because Kotz's latest report is not yet public.

A spokesman for the SEC had no comment. Kotz's report is being reviewed by the agency's Freedom of Information Act office.

In February 2009, the SEC filed civil charges accusing Stanford and three of his companies with fraudulently selling billions of dollars of the fraudulent CDs.

The SEC's charges were announced two months after Madoff was arrested for orchestrating a massive Ponzi scheme, which investigators have estimated at up to $65 billion.

The SEC has said it began investigating Stanford in 2005, and had been aware of complaints about his CDs even earlier.

But it has said it faced jurisdictional hurdles in pursuing an investigation against an offshore bank, in part because of a U.S. Supreme court ruling that limited its ability to regulate traditional bank products such as CDs.

In September, Kotz issued a report in which he found the SEC had bungled five probes that should have uncovered Madoff's fraud. Madoff pleaded guilty and is serving a 150-year sentence in a North Carolina federal prison.